If your business was impacted by the COVID-19 pandemic, you might be exploring various relief programs available to help you navigate recovery and propel your business forward. While there are legitimate initiatives under the CARES (Coronavirus Aid, Relief, and Economic Security) Act, such as PPP (Paycheck Protection Program) loans, and ERC (Employee Retention Credit) refunds that can provide much-needed financial assistance, it is essential to be aware of the prevalence of fraud and scams surrounding these relief programs, particularly in regards to the ERC.
Although the ERC offers an excellent opportunity to recover funds through legitimate tax credits, many scammers prey on business owners who are eager to leverage this credit. In fact, the IRS has identified tax fraud related to the ERC as the top issue on their Dirty Dozen List of Tax Scams for 2023. These fraudsters often deceive business owners by falsely claiming the owner is eligible for the ERC, in an attempt to steal personal and financial information.
You may be inspired to turn to your long-trusted CPA for help filing. However, many CPAs recommend working with dedicated ERC providers who can navigate the complexities of the ERC, because it falls under a highly-specialized sector of tax law. Even so, it is crucial to educate yourself on the basics of the ERC and exercise caution when selecting a provider to avoid fraud and improper filing, while maximizing your return.
Which ERC Providers Can I Trust?
First, be wary of providers who demand upfront fees before conducting any analysis. If an ERC provider guarantees your business a substantial refund and requests payment along with signed contracts before thoroughly evaluating your company, consider it a red flag. Any pressure for payment or contract signatures before evaluating the eligibility of your business could indicate fraud.
Second, inadequate disclosure should be a trigger warning. Reputable ERC providers should explicitly inform you to notify your CPA or tax preparer upon receiving your ERC checks. Beware of vendors who fail to emphasize the importance of accounting for the ERC on your income taxes. Additionally, a reputable provider should possess extensive knowledge of the ERC and educate you about events that impact your tax filing. The requirements for claiming the credit differ based on the applicable time period, and eligibility criteria have evolved since the program’s inception. The provider you are considering should be able to provide a detailed, step-by-step explanation of everything required by the IRS, and guide you through the necessary documents and expected timelines.
Lastly, lack of experience or a sense of uncertainty are also indicators of concern. It is essential to ask the tough questions that ensure the provider has sufficient experience navigating this intricate tax credit and is able to prioritize your best interests and stand confidently behind their work. For example, you may want to inquire about their support in the event of an IRS audit or events necessitating supplementary information. A trustworthy provider should maintain documentation for the required timeframe (five years) and continue to provide assistance in addressing any and all queries. Legitimate vendors should possess a solid background in accounting and taxation and be able to provide examples of their work across various industries, along with testimonials from previously-served clients.
Protecting Your Business After Claiming The Credit
Just as you would with any tax filing, you must keep records to substantiate the numbers on your ERC returns. Your provider should also keep records of the documentation you submitted and forms you filled out with them. Remember, it is critical that you remain honest and accurate with your documents as you are the one who will take responsibility for any inaccurate report.
Records to keep should include, but are not limited to:
- any governmental order to halt business operations;
- any records reference by the employer to determine whether more than a nominal portion of operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on business operations;
- any records the employer used to determine the existence of a significant decline in overall earning;
- any records of which employees received eligible wages and corresponding amounts;
- documentation pertaining to the assessment of whether the employer is a member of an aggregated group treated as a single employer for purposes of the ERC and, if applicable, the influence of this amalgamation on the determination and allotment of the credit;
- copies of the completed federal employment tax returns submitted by the employer to the IRS.
You must keep a copy of these records for a minimum of five years as that is the audit period for this particular tax credit.
Determining Eligibility for the ERC
As previously referenced, much of the fraudulent activity surrounding this tax credit revolves around scammers promising businesses large returns before determining eligibility. Here are a few points of reference to help you gain a sense of your own potential eligibility.
Your business, regardless of size, must have operated during the pandemic and encountered a substantial decline in gross receipts or notable supply chain disruptions due to government orders. If your physical location faced partial or full shutdowns – like reduced hours, capacity limits, or operational constraints – the impact should be more than nominal.
Additionally, employee retention is vital. Wages paid to W-2 employees between Q2 2020 and Q3 2021 may qualify, subject to the aforementioned factors. Small businesses (with fewer than 100 employees for 2020 or fewer than 500 for 2021) can qualify if a significant portion of their operations was disrupted by government orders.
One common misconception surrounding ERC eligibility is believing the credit is only accessible to large corporations or businesses that experienced complete shutdowns. However, businesses and nonprofits of all sizes that experienced qualifying setbacks can benefit from this program. If the closure of your physical workplace resulted in the suspension of certain business operations, you may be eligible.
This eligibility extends to a wide variety of industries—including nonprofits—, ranging from gyms and salons to restaurants and church organizations. To determine whether or not you qualify for the ERC, it is best to consult with a dedicated ERC provider who can guide you in understanding the eligibility factors.
What can ERC refunds be used for?
The last thing you would ever want to do after legally qualifying for a refund would be to deploy those funds in an unauthorized manner. Luckily, when a business qualifies for the ERC and receives a legitimate refund, they have the freedom to deploy the funds as they see fit. Unlike PPP loans, which have specific guidelines regarding fund allocation, ERC refunds offer more flexibility and can be utilized in various ways. For instance, Sterling Golf in Massachusetts utilized their refund to address necessary facility maintenance, including repairing the air conditioning system and renovating the clubhouse. Others, such as Healthy Habits in Indiana, allocated their refund to hire additional staff and support payroll.
If your business survived the COVID-19 pandemic and you have received an ERC refund, you have the autonomy to decide how to best utilize those funds to propel your business forward.
If your business has not yet applied for the ERC refund, rest assured that it is not too late. The deadline to apply for the 2020 tax year is April 15, 2024, and for the 2021 tax year, the deadline is April 15, 2025.
Now that you know the basics of the ERC and how to avoid the exasperating frauds and scams, you can seek support to claim the money that may be waiting for you. Remember, it is not a loan but is a refund on your taxes. No matter who you work with, the ERC can be a powerful tool to help you manage your expenses, keep employees on the payroll, and recoup expenses incurred during the global pandemic to help you grow.
Sunshine Chapman is a top performing affiliate with ERC Specialists; a company committed to maximizing Employee Retention Credit funding for small businesses.